Weekly Recap

February 16, 2018

Markets rebounded this week on positive economic data and stable interest rates. The CBOE Volatility Index (VIX) fell 33% as a sense of calm followed the recent selloff in stocks. Already, the 10% market correction has been cut in half; the S&P 500® Index ended the week down just 4.9% from its January 26 high. Last week’s downturn was exacerbated by strategies betting on low volatility; the 250% spike in the VIX triggered trading algorithms to unload stocks. That selling pressure appears to have abated for now. All sectors rose with large cap technology stocks leading in performance. The Nasdaq-100 Index, which includes Apple (+10.3%), Netflix (+11.6%), and Amazon (+8.1%), rose 5.6% this week to outpace the major indices. Small cap value stocks rose 3.9% to modestly trail the Dow Jones Industrial Average and the S&P 500® Index. Since January 2017, the Nasdaq-100 has outperformed the Russell 2000® Value Index by roughly 35%. We anticipate this differential will contract over time, especially as tax reform should disproportionately benefit smaller, domestically-focused companies. On Monday, the administration released its infrastructure proposal which calls for $200 billion in federal spending to be combined with $1.3 trillion in state, local and private investment over the next ten years. The plan was met with skepticism from members of Congress, particularly as it would impact the federal deficit, rely on public-private partnerships, sell federal assets, and “streamline” environmental reviews. Lawmakers will now attempt to mold the proposal into legislation; notably, infrastructure spending has historically received bipartisan support.

Economic data this week were broadly positive. The Small Business Optimism Index increased to 106.9, just shy of last November’s record 107.5 reading; businesses reported plans for expansion and investments in response to tax reform and deregulation. Consumer sentiment rose to a higher-than-expected 99.9 reading, the second highest since 2004; the report highlighted increased job security and higher incomes. And, new housing starts reached their second highest level since August 2007; single-family starts grew by 3.7%, while multi-family starts (apartments and condos) jumped 23.7%. Permits activity also increased 7.4% to signal continued strength in the residential housing market. Retail sales unexpectedly declined, though consumer-oriented categories, such as apparel, electronics, and appliances, increased. Meanwhile, the CPI rose 0.5% month-over-month, the fastest pace since January 2017, to reflect an accelerating economy and stoking concerns about inflation. Interest rates, though, remained relatively stable; the yield on the 10-year U.S. Treasury Note closed the week at 2.88%, up modestly from 2.83% last week, and the yield on the 30-year Treasury Bond ranged narrowly between 3.11% and 3.18%. Investors seem willing to accept that some inflation is appropriate given the strength of the economy.

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